Economy sluggish - but no rate cut tomorrow

The Reserve Bank is expected to adopt a ‘‘wait and see’’ approach to a further easing of interest rates at its first board meeting of the year tomorrow, despite a raft of weak data pointing to a softening economy.

But since the Reserve Bank’s last cut to the cash rate, commodity prices have strengthened, while the US, European and Chinese economies appear to be staging a recovery, BT Financial Group chief economist Chris Caton said.

‘‘The Reserve Bank will say, ‘Well, we may well cut again in the future, but we don’t have to be in a hurry to do that. We’ve already put a fair bit of monetary easing in the pipeline. Why don’t we wait and see what effect that’s going to have’,’’ Mr Caton said.

A key indicator that will be released two days after the Reserve Bank's meeting, the unemployment rate, is forecast by economists to drift slightly upwards to 5.5 per cent from 5.4 per cent the month before.

"I think the private sector is still indicating by its activity in the labour market that there’s still not moves to significant reduce the work force, otherwise we would see a lot more negatives on the monthly employment figures," Commonwealth Bank senior economist Michael Workman said.

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"On balance, the case is [the RBA] can sit, wait and watch. And maybe they can progress this argument that in December the rate cut was provided on a reading of the economy both here and offshore that was a little bit more negative than it’s actually turned out to be."

Inflation benign

Jobs ads fell for an eleventh straight month, building approvals dropped for the first time since last April, while inflation remains benign.

The TD Securities-Melbourne Institute's measure of consumer prices edged up 0.3 per cent in January, after a rise of 0.4 per cent in December.

The annual pace of inflation lifted slightly to 2.5 per cent, after hitting 2.4 per cent in December. It was in the middle of the Reserve Bank’s 2 to 3 per cent target band.

ANZ reported this morning that monthly job advertisements fell by 0.9 per cent last month. Job ads had dropped a revised 2.8 per cent in December, after a 2.8 per cent decline in November.

ANZ's head of Australian economics and property research, Ivan Colhoun, said the January results meant job advertising was "broadly unchanged", given the seasonal swings during the December and January period.

"We will need to assess the February data to ascertain whether the previous decline in job advertising is beginning to moderate," Mr Colhoun said.

At the same time, building approvals data from the Bureau of Statistics, also released this morning, revealed that dwelling approvals dropped 4.4 per cent in December in seasonally adjusted terms, against economists’ expectations of a 1 per cent rise. In November, approvals went up by 3.4 per cent.

Private sector housing approvals fell 3.3 per cent in December in seasonally adjusted terms, the Bureau of Statistics said, as the value of total buildings approved sank 1.9 per cent for the same month.

Cheaper holiday travel

TD Securities said a rise in the prices of utilities, transport fare in urban areas and education - mostly due to seasonal reasons - were the main contributors to the change in its gauge.

These rises were in turn offset by a fall in the prices of holiday travel and accommodation, clothing and footwear, and furniture and furnishings, it said.

The gauge showed food and vegetables prices rose by 1.2 per cent while car fuel prices fell by 0.6 per cent.

The data also showed that underlying inflation, or the trimmed mean, lifted by 0.2 in January, resulting in a rise of 2.2 per cent in the three months to December in annualised terms, the survey said.

The Reserve Bank board is set to meet tomorrow for the first time this year, with financial markets’ expectations of an interest rate cut this month standing at just 16 per cent, Credit Suisse data showed.

Rate cut on radar

Softer economic data and a strong Australian dollar have added further pressure on the RBA to lower interest rates, although most economists expect the central bank to act in March rather than tomorrow.

"The RBA is in a comfortable position to discuss the outlook and the risks at the Board meeting tomorrow, without reducing the cash rate further, for now," TD Securities Asia-Pacific Research head, Annette Beacher, said.

"Compared with this time last year, the cash rate has been lowered by 125 basis points to 3 per cent. We believe past RBA action has set the stage for a decent revival in the housing sector to support growth, as the impact of mining investment fades by year end," she said.

"The strong Australian dollar has allowed numerous goods and services to be imported at discount prices, although this impact likely to fade as the year unfolds as the [Australian dollar] stabilises."

A higher unemployment rate, which some economists expect to be revealed in Thursday’s Bureau of Statistics labour force data release, and subdued corporate capital expenditure plans could be factors in pushing the RBA to act in March.

The Reserve Bank has so far cut 175 basis points from the cash rate since the start of the easing cycle in November 2011.